Despite U.S. Sanctions Iran’s Budget Projects Higher Oil Revenues

As Iran’s oil exports have halved due to U.S. sanctions, the government has set 1,425 trillion rials income from oil, petroleum products and natural gas exports in the next year budget bill, which indicates a 32% growth year-on-year. Iran’s fiscal year starts on March 21.

The projected increase of oil revenues is odd since Iran’s exports have decreased in recent months due to U.S. sanctions. Before the reimposition of sanctions, Iran exported 2.5 million barrels per day (mb/d) of crude oil (including gas condensate), but the volume halved and is expected to decrease further in the coming months.

President Hassan Rouhani submitted the budget bill to parliament on December 25.

The government budget would receive 65.5% of total oil export revenues (including gas condensate), petroleum products (diesel and fuel oil) and natural gas. The rest of the revenues would directly go to National Development Fund (NDFI) and the National Oil Company (NIOC).

It is still not clear based on what kind of projections does the budget bill forecast a revenue growth from oil. There are no details about the exact oil export volume, oil price and the rate of the U.S. dollar used to calculate the revenue in local currency. However, according to earlier statements of officials and parliament members, the government forecasts the export of 1.5 mb/d crude oil and gas condensate at $54/barrel, while official USD rate would be 57,000 rials.

Currently, the official USD rate is 42,000 rials and this can be part of the explanation as to why more oil income is expected. By simply changing the official currency rate to the higher number of 57,000 rilas to a dollar, the oil income also increases in local currency.

Alongside oil and gas condensate, Iran is also exporting about 360,000 b/d of diesel and mazut (fuel oil). It is not clear whether the country can maintain petroleum products export volume under sanctions regime or not.

Possible scenarios for budget’s oil and gas incomes next year

Budget Income

Crude Oil export (1.5 mb/d)

Petroleum products (260-360 kb/d)

Natural gas (30-60 mcm/d)

Total

Rial-based Income

(trillion rials

1,104

170 to 245

76 to150

1,425

USD-based income

billion

$19.4

$3 to $4.3

$1.3 to $2.6

$25

Each USD rate at 57,000 rials.

Why Iran eyes 32% growth in rial-based budget oil income?

Besides the arbitrary change in the USD exchange rate, which helps to project higher revenues from oil exports, there are also other factors.

One important reason is a higher share from total oil revenues in the new budget plan.

In the current year, the National Development Fund receives 32% of oil revenues, but it would receive only 20% next year; the difference going to the budget, increasing oil income by 12% to 65.5% for the operations of the government. This is simply taking from the nation’s savings account and spending money for current needs.

Iran also started limited amounts of natural gas exports to Iraq in July 2017 and the volume has reportedly increased recently to about 28 million cubic meters per day (mcm/d).

Baghdad has got sanctions waiver from the U.S. to continue Iranian gas imports until March 2019, but it seems the waiver would be extended beyond that date because a significant part of Iraq’s electricity generation depends on Iranian gas. Baghdad recently annouced that Iraq has no choice, but to import Iranian gas for at least the next two years.

The country has signed two contracts to reicive 50 mcm/d Iranian gas, but it is not clear when the volume would reach the contractual level.

Iran also exports 25-27 mcm/d gas to Turkey.

Setting projected oil price at $54 in the budget bill seems quite realistic, though the current Brent benchmark (which is $2-3/barrel higher than Iranian crude) stands at 52.14. However, according to the U.S. Energy Information Administration’s latest short-term energy outlook report, Brent spot prices are expected to average $61 in 2019.

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